Bond Yield Carry Traders: Fade Upcoming Events?

The trend in the bond markets the last several months, and basically all of 2014 has been to buy bonds in the dead periods of econ reports, or the econ reports that would be detrimental to their non-growth, more dovish Fed case. And the last several weeks have been similar to the prior months, basically wait for the stellar job`s report blows yields up to 2.70% on the 10-Year and then buy bonds, pushing down yields in the three weeks after the Employment Report, with the goal of getting out before the next Employment Report.

Most Important Week in Trading

In two weeks though there is more than just the employment report for bond holders to fade in their overzealous addiction to yield carry trades as we finally get the first look at second quarter GDP, and no bond trader in their right mind is going to want to be long bonds in front of this report, with government data who knows what the actual number ends up being.

Literally regardless of what the actual GDP number ends up being due to revisions, the headline first look at 2nd QTR GDP could overstate or understate the actual GDP growth rate by 1, 2, or even 3% as we saw with the first quarter GDP. Remember first QTR GDP originally came in at a positive .01%, and ended up after revisions down a negative 2.9%.

So literally the second quarter GDP could be growing at 3% and the number come in at 6%, government data is just that ‘noisy’ to quote the Fed Chairperson. At any rate expect bond yields to move up ahead of this event as yield traders get out of this trade on event risk, and depending upon the number in concert with the other econ reports of this important week evaluate whether to get back in on this trade.

CPI, GDP, Bond Auctions, FOMC Meeting & Employment Reports

As I mentioned the last week in July is an important week, but it isn`t the only econ report yield traders need to fade as next week on Tuesday is CPI for the inflation reading on the economy, a 10-Year TIPS Auction on Thursday, all setting the stage for one of the most important weeks of the year in terms of setting the tone for the remainder of the year in the Bond market.

Literally this last week in July trading week is going to either confirm or change many portfolio and trading strategies going forward for the second half of the year in our opinion. The FOMC meets on Tuesday July 29th, but Wednesday July 30th is the day that all traders need to mark on their calendars, this is probably the most important day of the year so far in 2014.

First we have the ADP Employment Report at 8:15 ET, followed by 2nd QTR GDP at 8:30 ET; so ADP gives the market the first look at the Employment Report for Friday of that week, and as we mentioned earlier the GDP report either confirms the 1st quarter GDP growth trajectory, or illustrates that this was an anomaly due to bad weather and inventory overhang issues. However, the trading day is just getting started as there is a 7-Year Note Auction at 1:00 PM ET followed by the FOMC Meeting Announcement at 2:00 PM ET, and depending upon the Employment and GDP data as the Fed will have both numbers going into their FOMC Meeting, we could get some fireworks in the form of changed language in the FOMC Statement if either of these numbers is extremely hot.

But the Econ Data doesn`t stop there as on Friday August 1st the Employment Report, Personal Income & Spending Report and two important Manufacturing Reports come out for traders to digest at the end of this market moving week of economic data.

In Summary: Trend Change or Status Quo?

Traders will not have to worry about low volumes and sleepy conditions during much of this week, and some markets like bonds will move in anticipation of the reports, and either enter a new trading pattern for the second half of the year, or continue with the status quo of buying bonds after the Yield Sensitive Econ Reports are out of the way for the next couple of weeks.

We literally have had 25 basis point moves in yields in the 10-Year the last couple of months in between the Monthly Employment Reports. The yields spike on good employment numbers, and then bond yield chasers push down yields like equities traders push down volatility in reaching for higher highs in the stock market!

We shall see if this time is different, as at some point there is going to be a sea change in bonds, and it is coming sooner rather than later, the question is does this last week in July and its important Econ Data finally cause the Sea-Change in Bonds? July 30th may end up being the most important trading day of the year in setting the stage for the remainder of 2014 for portfolio managers.